KNOW THE FINANCIAL REPORT OF THE BUILDING:
Whether you are a first time buyer or a seasoned investor buying a New York City Condo, Co-Op, Condop, or Townhouse it is important to understand the full financial picture of the building. When you are buying an apartment, besides buying the single apartment unit in the multi-dwelling complex you are also buying into a building. Having a financially sound building can help avoid any future unexpected costs. A number of common questions usually asked by prospective buyers are does this building have any upcoming assessment, what is the underlying mortgage, if so how much, and what is the tax deductibility in this building. Your attorney as part of their due diligence will go over the buildings financial documents, but here is an overview of the major areas that you as a buyer should be aware of.
A building’s financial statements are made up of three different areas: Income, Expenses, and Assets. The amount of cash and/or reserve fund that is held by the co-op or the condominium makes up the asset portion of the financial statement. The cash on hand is the amount of liquid assets held by co-op or the condominium. The reserve fund typically refers to the money that is used to make improvements or repairs that occur throughout the year.
When the building decides to make improvements or when major repairs occur such as, boiler change, elevator upgrades, updating the hallways or lobby the buildings reserve funds are tapped into to finance these expenditures. How much money should be in the reserve fund? Typically the reserve fund should be equal to one-third of the annual maintenance income of the building. So that number can fluctuate depending on the size of the building, what major improvements or repairs have been made and a number of different factors. So what happens when the reserve funds are depleted? Some co-ops replenish the reserve funds by receiving income from a “flip tax.” Flip tax is a bit misleading, it’s not a “tax” but rather a charge imposed when a unit is sold. It is important to ask to see if the building you are considering has a flip tax. This flip tax can be the seller’s responsibility, or possibly the buyers and sometimes will be split between the two parties. The flip tax is very important to consider.
Next, look at the section on the income and expenses for the building. This section will indicate whether or not the maintenance or common charge payments cover the operating expenses. If it does, the result will be a cash surplus to the building. If it does not, the result will be a deficit. If there is a deficit, the money received from flip taxes, sublet fees, commercial rents, laundry income or any other revenue source will be used to cover the shortfall. If there is still not enough income there could be a maintenance increase or a special assessment to cover the shortfall.
The Underlying Mortgage and Sponsor-Owned Shares
The status of a co-op building’s underlying mortgage is extremely important to understand and investigate before you purchase. Many of the co-op buildings will have a mortgage like any other real property. The buyer’s attorney will review as part of their due diligence what type of mortgage exists, how many mortgages there are and how long is the mortgage for.
A condominium does not have an underlying mortgage on the building because each individual unit is real property. However, it’s important to know how many units the sponsor owns in the building. The reason being is that the sponsor has to pay real estate taxes, common charges and any possible mortgage they have for the units. If for some reason the sponsor is unable to pay for all those expenses, the building as a whole will be affected. This information is usually disclosed in an amendment to the offering plan and will be a part of the due diligence of your attorney to examine.
The financial statement will supply a lot of insight for the building but you need to consider other areas as well. The following areas to consider are whether there have been assessments, is there a tax abatement and when will it expire, is the property on a land-lease, the common charge or maintenance history, how many apartments are investor owned, is there a flip tax, are any major upgrades or repairs in the near future, any pending litigation, and if there are commercial leases that bring income to the building and when are those leases expiring.
Hiring an attorney that is an expert with New York City apartments is such a crucial step for any buyer especially first time apartment buyer. Your attorney will have the expertise in understanding the financial documents and will be able to discover the inner workings of the building you are looking to purchase into through their due diligence. As an educated and informed first time buyer you should always team up with a Real Estate professional to assist you navigate through this complex process to ensure you make the right decision.
